Scope economies, entry deterrence and welfare
AbstractThis paper develops a model where the incumbent may expand to a second related market so as to signal the existence of scope economies and deter potential entry. We show that the incumbent only expands to another market when scope economies are large enough. Thus expansion is indeed a signal of larger economies of scope and, for certain parameter values, it leads to entry deterrence. We show that the perfect bayesian equilibrium may involve entry accommodation, entry deterrence or a mixed strategy equilibrium. We investigate the welfare implications of prohibiting an entry deterrent expansion. In our model, such prohibition would always decrease consumer surplus. The welfare impact of preventing entry deterrence is ambiguous but negative for many parameter values.
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Bibliographic InfoPaper provided by University of Evora, CEFAGE-UE (Portugal) in its series CEFAGE-UE Working Papers with number 2012_11.
Length: 27 pages
Date of creation: 2012
Date of revision:
Scope economies; signalling; entry deterrence.;
Find related papers by JEL classification:
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising
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